Outlook for the luxury sector is clouded by China’s slow recovery

By Mimosa Spencer

PARIS (Reuters) – Sales updates from major European luxury brands offer little assurance that Chinese demand for luxury fashion will recover, leaving a cloud over the sector’s outlook.

Kering warned on Tuesday that profits would fall sharply in the first half of the year and signaled low demand in Asia, and China in particular, in addition to the battle to turn around star label Gucci. That sent its shares to a six-year low on Wednesday.

Italian luxury group Ermenegildo Zegna also saw sales fall in the first quarter, due to declining sales of its Thom Browne label in the Greater China region.

The exception was Italian family-owned Prada, which reported booming demand for its fashion brand Miu Miu and continued growth in Asia.

Moncler will report later on Wednesday and Hermes on Thursday.

Solid reports last week from luxury supplier LVMH and beauty giant L’Oréal had helped boost confidence but failed to allay concerns about domestic Chinese appetite for their premium goods and the wider sector.

The luxury industry had forecast a challenging first quarter compared to the same period last year, when business boomed after China lifted strict COVID lockdowns.

But an “arsenal of headwinds” is keeping China’s economic growth sluggish, Deloitte chief economist Ira Kalish said at the World Retail Congress in Paris last week, citing a real estate crisis, stagnant private sector investment and trade disputes.

According to consultancy Bain, the luxury goods industry has become dependent on rapid growth in China, where the market tripled in size between 2017 and 2021.

“Everyone was a winner, including the losers,” said Jacques Roizen, managing director of consulting at Digital Luxury Group.

In an environment of slower Chinese growth, he expects the strongest brands to increase their lead.

“If you’re in a market that’s growing at 4%, you’re going to see Hermes or Loro Piana growing at double digits, but you’re also going to have a lot of brands with very negative year-over-year results,” Roizen said.

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Executives are pinning their hopes on stimulus measures from the Chinese government.

“We have yet to see measures that will really boost Chinese consumers’ confidence and therefore their spending,” L’Oréal boss Nicolas Hieronimus said last week.

PATIENCE

LVMH, which sells fashion and accessories from Louis Vuitton and Dior and jewelry from Tiffany & Co. sells, said first-quarter sales in Asia excluding Japan fell 6%.

But it said Chinese consumers had been buying an increasing share of their goods outside the region, traveling to Japan and Europe – a view Prada reiterated on Thursday.

Fashion brands such as Chanel, Hermes and LVMH’s Louis Vuitton are seen by analysts as well-placed to strengthen their position in China during a period of slow growth because their base of older, wealthy customers is less vulnerable to economic headwinds.

So they can invest more in marketing events and expanded, higher quality retail spaces.

“China will succeed in boosting its economy again,” LVMH Chairman and CEO Bernard Arnault told reporters last week.

France-based LVMH is pushing ahead with plans to expand its retail network in mainland China, although chief financial officer Jean-Jacques Guiony said last week this had been the subject of internal debate.

“This is a question that has been bothering us for a while,” he said when asked if he was comfortable with the number of ongoing projects in China.

Kering has expanded its Chinese management team, resuming in-store training that was paused during the pandemic and working with local brand ambassadors. But such efforts would not yield immediate results, the company warned.

“It will take some time to bear fruit, and we know this will take some patience,” said Kering CFO Armelle Poulou.

(Reporting by Mimosa Spencer, additional reporting by Helen Reid; Editing by Matt Scuffham and Catherine Evans)